Fortum comments on the EU environment and energy State aid guideline review

The European Commission is in the process of reviewing the Guideline on environmental State aid and has asked Member States and other stakeholders to comment on the issue.

The main element in the review is that energy-related State aid will be combined with the environment State aid guideline. We regard the proposed review as welcome and needed, and want the following messages to highlight Fortum’s point of view (full response by Fortum attached):

Regarding energy infrastructure, the State aid guideline covers only electricity networks; in our view, also district heating and cooling networks should be covered (especially in cases where the production is based on energy-efficient combined heat and power production), as well as infrastructure relating to the storage and transport of biogas and CO2.

Priority access of renewable electricity to the electricity network (which is currently applied in several Member States), as well as other exemptions from all market responsibilities, such as balancing responsibility, provided for renewable electricity producers should be regarded as State aid for renewable energy.

Capacity mechanisms should be used only in such cases where capacity adequacy assessments clearly indicate that there is a need for capacity mechanisms in order to secure electricity production. Possible capacity mechanisms should be based on common EU-level criteria and rules, and they should be regional rather than national.

Technology neutrality is an important principle that should be taken into account not only in subsidies for renewable energy but also in indirect State aid through taxation as well as in capacity mechanisms. Taxes that are targeted to non-emitting energy production, such as hydro and nuclear (for example, real estate taxes and windfall profit taxes), should be assessed in the State aid guideline as being an indirect State aid to emitting energy production.

The key target of the EU Commission is to prevent over-compensative State aid, which in Fortum’s view is a good starting point. It should, however, be noted that with a technology-neutral approach it is not possible to completely avoid over-compensation because the subsidy level is always determined on the basis of marginal costs of the least efficient production unit. Over-compensation to a certain extent is also positive because it gives companies an incentive to start using more efficient production technologies and production units.

Regarding renewable energy subsidy schemes, there should be a shift from production subsidies towards more market-neutral investment subsidies and research and development subsidies. After 2020, all production subsidies should be gradually phased down. However, subsidies for local, environmentally sustainable fuels, such as biomass, biogas and bio oil as well as processed and unprocessed waste – especially when these are used for energy-efficient combined heat and power production – are an exception. Subsidies for these fuels are justified also in the future because these fuels have to be continuously procured from the competitive market, and the marginal costs of production do not decrease ’in the same way as, for instance, in wind or solar power production.

Fortum is of the opinion that emissions trading is the most cost-efficient way to reduce carbon emissions from energy production. In fact, subsidy systems for renewable energy sources should take into consideration the steering effect of emissions trading, and the subsidies should be set at a level that doesn’t weaken the functionality of emissions trading. In terms of efficient functioning of the market, it is essential that future subsidy systems are at the very least regional, not national